Pacific Institute Insights

Financing Drinking Water Infrastructure – Updates from the Golden State

By Kristina Donnelly, Research Associate

July 16, 2013

It should come as a surprise to pretty much no one that infrastructure in the United States needs serious, sustained financial investment. The American Society of Civil Engineers (ASCE) finds that one in nine bridges are structurally deficient; 240,000 water mains burst each year; 40% of major urban highways are congested; and 4,000 dams are structurally deficient, half of which would cause significant economic damage or loss of life if there were a collapse. And those are just three random facts I selected to make a point; think of all the other scary facts the ASCE could probably come up with.

As if collecting scary statistics weren’t enough, ASCE also periodically grades our nation’s infrastructure. In what could marginally be characterized as “good news,” their 2013 report card increased the nation’s overall infrastructure grade from a D to a D+, the first increase in 15 years. This was due, in part, to a rise in private financing of public works projects, as well as improvements made using funding from the $800 billion American Recovery and Reinvestment Act.

Unfortunately, the same report card gave our drinking water and wastewater systems a solid “D” each.

The EPA’s 2013 infrastructure needs survey and assessment calculated that the U.S. will need a $384 billion investment in drinking water infrastructure over the next 20 years.

This isn’t the only (depressing) national assessment of drinking water infrastructure needs. The EPA’s 2013 infrastructure needs survey and assessment calculated that the U.S. will need a $384 billion investment in drinking water infrastructure over the next 20 years. California, maybe unsurprisingly, has the largest drinking water infrastructure need in the country, totaling more than $44 billion. On the bright side, this turns out to be just shy of only $60 per person per year, which doesn’t sound like very much at all. Yet, we do not (and should not) fund public services by asking customers to just write a check.

So where is this investment going to come from? A new report from American Rivers describes in depth the various options available for financing new drinking water infrastructure. According to the report, about 90% of the financing for water infrastructure in the United States comes from two sources: State Revolving Funds (SRFs) and municipal bonds. The SRF distributes low-interest loans to water utilities for infrastructure projects, and municipal bonds are long-term, often tax-exempt debts that are issued by local governments or the water systems directly. These costs are ultimately borne by the customer and are repaid through water rates and other fees.

The kind of financing that a water utility uses for a capital improvement project depends on the size of the system; small systems are not usually able to issue bonds and therefore rely heavily on the SRF for large infrastructure investment. While medium and large systems (serving >10,000 customers) also have access to SRF loans, they have the capacity to issue debt through municipal bonds, and so do not rely as heavily on this source of investment.

Meanwhile, in California…

In April of this year, the state of California’s Department of Public Heath (CDPH) received formal notice from the EPA that that they had been out of compliance with the Safe Drinking Water Act since September 2012 for failing to distribute $455 million they had received for the Safe Drinking Water SRF.

In the same paper from the CDPH:

Small water systems in California face serious challenges to water quality. According to the CDPH, although 2% of community water systems in California receive drinking water that does not meet all primary drinking water standards, 8% of the 2,100 small community water systems violate one or more health-based drinking water standards. Many of these are in disadvantaged communities where the median household income is less than 80% of the state median. Unfortunately, this means that the SRF is not, on its own, going to fix the problem; in the same paper from the CDPH:

“To ensure that systems can maintain compliance, it is imperative that the water rates in these communities be set at a rate that provides for adequate operations and maintenance (O&M), as well as replacement of facilities over time. While recent legislative efforts allow CDPH to provide 100% grant to certain water systems serving severely disadvantaged communities for infrastructure improvements, there are still those systems who will not be able to afford the ongoing O&M costs.”

This is an ongoing issue that isn’t going to be solved quickly, or by CDPH alone. Thankfully there are many organizations working to improve drinking water quality in California, and to build institutional capacity where it is most needed. It is important that this continue as CDPH works to address EPA’s recent concerns.

 

Pacific Institute Insights is the staff blog of the Pacific Institute, one of the world’s leading nonprofit research groups on sustainable and equitable management of natural resources. For more about what we do, click here. The views and opinions expressed in these blogs are those of the authors and do not necessarily reflect an official policy or position of the Pacific Institute.

4 Responses

  1. […] Paying for drinking water infrastructure:  With California's drinking water infrastructure needs totalling over $44 billion, how could we possibly pay for that?  ” … A new report from American Rivers describes in depth the various options available for financing new drinking water infrastructure. According to the report, about 90% of the financing for water infrastructure in the United States comes from two sources: State Revolving Funds (SRFs) and municipal bonds. The SRF distributes low-interest loans to water utilities for infrastructure projects, and municipal bonds are long-term, often tax-exempt debts that are issued by local governments or the water systems directly. These costs are ultimately borne by the customer and are repaid through water rates and other fees. … “  Read more from the Pacific Institute:  Financing Drinking Water Infrastructure – Updates from the Golden State […]

  2. Sandy Kozlen says:

    With 16 years involvement in water and the director that first requested our local district to create its first 100 year master plan, I have long thought that we need to transition to a requirement for water agencies to have sinking funds for infrastructure replacement. I once proposed that California establish a sinking fund requirement and ACWA form a JPA for an agency owned infrastructure bank, much like the very effective Joint Powers Insurance Authority. Backed by a state law requiring building of sinking funds, local agencies could raise rates for the funding process. The water agencies would deposit the sinking funds in the bank which would use those funds and the proceeds from larger, lower interest and overhead bond issues, to make lower interest, rate secured loans to the water agencies for infrastructure projects. Borrowing from a bond pool at the infrastructure bank should be much cheaper than lots of agencies issuing their own bonds. The agencies would get higher returns on the cash they deposited in the bank and the loans would be rate secured, so there should be a minimal loss experience. It would take courage to write the laws to establish the sinking fund requirement and bank. But, in thinking long term our children and grandchildren would come out way ahead and that is what we are here for. Have fun – Sandy

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